National Association of Home Builders Discusses Economics and Housing Policy

A Big Drop in Energy Prices in February

The Bureau of Labor Statistics (BLS) recently released the Consumer Price Index (CPI) for February. The Consumer Price Index declined at a seasonally adjusted annual rate of 2.0%, after a 0.3% increase in January. Excluding the volatile food and energy components, the “core” CPI rose at a seasonally adjusted annual rate of 3.4% in February, slightly down from 3.6% in January. In February, energy prices declined at a seasonally adjusted annual rate of 52.1%, following a 28.5% decline in January.

In February, a significant increase in the prices of medical care and apparel accounted for most of the increase in core inflation; a steep decline in energy prices pulled down headline inflation, making the gap between headline inflation and core inflation larger.

A “real” rent index is constructed to indicate whether inflation in rents is faster or slower than overall inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster (slower) than overall inflation, the real rent index rises (declines). The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components).

After declines during the recession, inflation in real rents accelerated from 2012 to 2014, a period of strong recovery in the multifamily sector, reaching a peak average annual rate of 1.7% in 2014. In 2015, real rent inflation slowed down slightly, averaging 1.6%. In February of 2016, real rent inflation slowed down to an annual growth rate of 0.3%.